I think he should turn it into a medium to long term trade and watch it go to $3.50 plus before even worrying about what to do
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Roughly what sort of time frame would med-long term be?
Let me add to the debate. First things first we need to clear up what the actual earnings were for the 2014 year. As some of you know this isn't easy and the International Financial Reporting Standards, (IFRS), aren't in my opinion always the gold standard they purport to be.
Statutory profit after tax was $262m.
The normalised profit after tax you may have heard was a lesser figure due to removal of the fuel and exchange hedging and derivatives gains. That's fine but as far as I'm concerned as they're embarking upon these hedging and derivatives programs on an ongoing basis so this forms part of their actual earnings for the year. Whether they can repeat those gains in 2015 is obviously an open question.
Less obvious is their treatment of what in years gone past would have been considered to be an extraordinary item, (i.e. non-recurring), the $45m they spent on one off redundancies, heavy maintenance operation rationalisation and fleet rationalisation including fleet transition costs Air are moving to streamline their fleet and maintenance operations and these are one-off costs which they took above the line as a simple increase in labour costs.
If we add the net effect of that back $32.4m ($45m less the tax at 28% that they wouldn't be able to claim if this was seen as it should have been in more traditional times as an extraordinary item) we get true operating profit from ongoing operations inclusive of fuel hedging gains of $294.4m after tax or 26.5 cps.
On that basis I think EPS of approx. 30 cps is attainable for 2015, (excl VAH) provided the economy stays in reasonable shape and there's no major new geopolitical issues. VAH is too tough to value and given an uncertain outlook I have discounted any value in this investment at present until proven otherwise.
I accept to some extent we need to consider the trough / peak cycle PE rationale but I'm also aware that Airlines globally are now being viewed as growth stocks and global airline PE's continue to suggest there's significant room for AIR's current PE to expand. Whether it does or not, only time will tell. With all due respect to one or two previous comments, I think some people are seriously underestimating how much PE expansion has occurred around the world in a post GFC environment on the back of some of the lowest government stock rates in living memory. Have a look at some of the other airlines current PE's !!!
I think there's room for the SP to track north towards $3.00 as the 2014/5 year unfolds given reasonable global conditions. Air need to show they can utilise the capacity expansion they're bringing to market, (remember they have capacity expansion of circa 5% per annum planned for several years), and grow their top line consistent with capacity and if load factors stay consistent with 2014 and fuel prices remain stable then shareholders will enjoy excellent rewards as the year unfolds.
Couta, as promised here is my cashflow statement for 2 scenarios:
1. Punter A buys AIR at $2 and holds to the ex-div date.
2. Punter B buys AIR at $2 and Sells at 2.30 on the close before the ex-div. Thus does not receive dividend
Assumptions:
1.Price falls to (2.30-15.5)=2.145 on ex div date
2.Both punters are traders and pay capital gains
3.The tax rate for both punters in 33%
4.The AIR dividend is fully imputed and taxed correctly (which AIR is)
5.No slippage and no interest received on funds(not material)
6.Brokerage rate of 0.3%
7.For tax purposes, the punter is a trader and liable for tax
8. Punter A buys back on the ex-div date
Punter A
Capital Gains (unrealised) 0.1450 Capital Gains Tax -0.0479 Div received 0.1550 Add Tax on Div* 0.0000 Cashflow Position 0.2522
Punter B
Capital Gains (realised and including brokerage of .0129) 0.2871 Capital Gains TAX -0.0947 Div received 0.0000 Add Tax on Div 0.0000 Cashflow Position 0.1924
So in summary, you are better of holding.
*A note from the IRD website:
You only need to tell us about dividend income if the total was greater than $200 and it wasn’t taxed at the correct rate, or if you are liable for child support. All dividends have tax deducted at 33%
Disclaimer: I'm not a tax consultant. I suggest you seek advice and don't rely on my calculations.
There's so many different variables depending if people are traders, declaring their gains or trying to avoid them or investors and much depends on people's personal tax rate.
One thing to be aware of is that the maximum imputation credit a company can attach to a dividend is 28%, (their own company rate) and the other 5% is taken out of the dividend by way of dividend withholding tax and remitted by the company to the IRD and needs to be claimed back in people's tax returns where their personal rate is less than 33%, (<$70,000 personal income).
I suppose I should trot out the well worn line that if people are unsure how to optimise their position they should take professional advice.
Good post.
Agree that PE's have been on the up, but calling airlines growth stocks is a big stretch. Just because some investors are being stupid and overvaluing some airlines (in my opinion), doesn't mean we should with AIR. There is a saying in the investment industry - 'this time its different'. Again and again time proves that its not different.
I maintain that as we move into FY15 and FY16 using an 8x PE multiple is appropriate for AIR, and consistent with the somewhat low valuation NZ investors have traditionally applied to the stock. After years invested, and numerous discussions with management, I have to conclude that some of this discount is warranted, because like it or not its still government owned, and management is not acting 100% to maximize shareholder returns.
Don't worry too much folks - there's still 40% upside on my valuations.. :)
-mod
I think broadly we're on the same page but arrive at a $3.00 price through slightly different methods. Once they prove they can use the capacity expansion I think we're in clover :)
I'll have a chat with management at the AGM to check if the new Dreamliner is performing according to specifications.